FDI and Trade. Exemplification of Poland and other Post-communist

States

Katarzyna Zukrowska Malgorzata Gracik Anna Pochylczuk Dominik Sobczak Jolanta Zombirt

Ezoneplus Working Paper No. 7A

August 2002

FIFTH FRAMEWORK PROGRAMME

Ezoneplus

The Eastward Enlargement of the Eurozone Research Project HPSE-CT-2001-00084 Fifth Framework Programme 2001-2004

European Commission www.ezoneplus.org

Jean Monnet Centre of Excellence Freie Universität Berlin

Ihnestr. 22, 14195 Berlin, Germany Phone: +49 (30) 838 – 54966

Fax: +49 (30) 838 – 52357 Email: info@ezoneplus.org

2

Ezoneplus Working Paper No. 7A August 2002

FDI and Trade. Exemplification of Poland and other Post-communist

States

JEL–Classification: F02, F15 Keywords: Eastern Enlargement of the EU, Trade, FDI

Corresponding authors: Prof. Dr. Katarzyna Zukrowska Warsaw School of Economics Institute for International Studies Rakowiecka 24 PL – 02-521 Warszawa zukrowsk@warszawa.ho

This paper has been prepared as a part of a broader Ezoneplus project that evaluates European Monetary Union (EMU) and its enlargement to prospective members in central and eastern Europe. The project is financially supported by European Commission (HPSE-CT-2001-00084).

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Warsaw School of Economics

Katarzyna Zukrowska,

Malgorzata Gracik, Anna Pochylczuk, Dominik Sobczak, Jolanta Zombirt

FDI and Trade.

Exemplification of Poland and other Post-communist States

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1. Introduction

Study is focused on mutual relations between FDI and foreign trade in economies going

through systemic transformation after 1989. Its aim is to indicate: (1) how big were the

streams of FDI inflows and outflows; (2) what were the institutional arrangements for

liberalization of FDI and trade; (3) what type of impact had FDI flows on foreign trade: was

it stimulated and if so, in what direction (imports or exports); (4) who were the main

investors (states engaged in capital exports) and branches most attractive for investors.

The study is illustrating a new approach to international economic relations in which

assumption that production factors are not transferable internationally on large scale and thus

stimulating foreign trade is replaced by an assumption that production factors are transferable

and thus stimulating trade and in consequence wealth. They also increase interdependence

within the process of integration on regional scale and globalization on worldwide scale.

Study is aimed at showing scale of flows and their role in restructuring and deregulating

the economies in transformation, bringing them at the same time closer to newly formulated

division of labor in which globalization is a process seen as integration on a wider scale than

during previous years within the divided world.

2. Theory on FDI and trade

Transferred capital are financial means which used abroad create obligation between exporter

and importer. Savings in households, companies, national budgets, banks, etc forms such

capital. Transferred savings can be used for financing consumptions or investments. Their

meaning in transformation is rather crucial as course of transformation, namely starting

conditions, decide that the process is conducted in specific setting, characterized by lack of

savings and in consequence lack of capital. Lack of savings in one group of countries can be

recompensed by their availability in another group. This can not be done automatically but

requires at least two conditions: (1) economy, desiring to import capital needs to be open up

for capital transfers in both ways (imports and exports), what should be done in a reliable

manner, assuring guarantees for investors, that their capital will not be captured (nationalized,

or trapped in another way in the economy); (2) economy should be attractive for investors

guaranteeing that their capital engagement will bring profits.

Capital transfers are subordinated to concept of bringing profits to its owners. This does

not mean that transfers are profitable only for exporters as they are profitable for importers

as well by creating jobs, stimulating foreign trade and finally by taxes financing state budget.

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Practice shows that importers of capital turn into exporters with advancement of

development of their economies. This was the case with Asian tigers; this is evidenced also by

the experiences of East-Central European economies.

International capital transfers consist of two main streams: (1) credit moves; (2)

production capital moves. Credit transfers or borrowing capital transfers are financial inputs

transferred internationally embracing different types of securities (often obligations) but

excluding shares. Production capital is present in international transfers in form of portfolio

investments or direct investments. Transfers of capital are more complicated than transfers of

labor, especially when we compare immediate results of both transfers. Labor transfers have

immediate effect on the two economies engaged, while in case of capital transfers the effect is

usually postponed in both cases either it is engaged in consumption or investment. In case of

capital transfers investors are more threatened by risk, moreover transfers engage a number

of middle-traders (making their profit on their own account). Both labor and capital transfers

have impact on balance of payments. In case of labor transfers positive effects for exporter

occur when workers transfer their incomes back home, supporting their families. Such

transfers do not occur when the whole family emigrates. Often money transferred is utilized

as accumulation of capital and a starting point for future investments. In case of capital

transfers the impact on balance of payments is different. Such transfers occurred mainly in

transforming economies in effect of privatization counterbalancing outflows of capital used

for imports of investment goods1.

Generally there are two following sources of profits linked to capital transfers:

• Interest paid to the lenders of different types of capital suppliers, which depends on

type of capital engaged, length of period for which the credit was drawn; size of risk

evaluated for the economy by specialized in this field of assessments companies; type

of engagement – how long the capital is frozen before it starts to return profits;

environment for business in the economy; etc.

• dividends paid for foreign portfolio investments.

Same as in case of labor transfers – capital transfers bring qualitative and quantitative

effects for the economies engaged in the process. They can be studied for exporter and

importer. In both cases they bring additional incomes to: capital owners and country

hosting capital, achieved by the size of marginal value of production of the invested

capital, which traditionally is smaller in developed economies and higher in economies

1 E. Kawecka-Wyrzykowska, E. Synowiec (red.) Unia Europejska. Przygotowania Polski do czlonkostwa, IKiC, Warsaw 2001, p. 654.

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representing lower level of development. This is so at the starting point when those

differences decide about the rentability of engaged capital: usually with perspective of

lower increases in exporting capital economy and higher in importing (Cobb-Douglas).

Transfers of capital bring different results in both economies engaged as exporters of

capital and importers. In country exporting capital following effects can be observed:

• the size of capital engaged in production is getting smaller, what results in the

decrease of size of production;

• the average and marginal production of capital is increasing;

• the interest rate is increasing.

In country importing capital one can observe:

• increase of capital engaged in production, causing increase of production;

• lowering of marginal and average production of capital;

• decrease of interest rate.

The listed effects should be supplemented by following additional effects:

• increase of incomes in both cooperating economies;

• direct income from capital exports and imports;

• positive effect of capital transfers on capital market.

The division profits (loses) of foreign capital engagement between two parties occupied

by the transaction should be defined in a study dealing with capital transfers. Generally most

economists represented view that the exporter of capital gains more from capital transfers

(McDougall2, Kemp3) but according to other theories (Ruffin4) the capital moves to

economies well supplied in labor what in result gives more profits to those economies better

supplied in labor than in capital.

The profitability of capital transfers is changing when goods transfers supplement

transaction as well as changes of technologies applied in production. Economists argued that

trade of goods indirectly causes leveling of factors of production, while production factors

transfers cause leveling in direct form (Mundell5). Technical knowledge is one of the factors

that influences productivity and thus profits of parties engaged. Capital and labor transfers

are both channels through which technical knowledge is transferred. Traditional theories

assumed that technology and knowledge are fixed and thus do not have specific impact on

2 MacDougal, R.H. Snape (ed.), Studies in international economics, McGraw Hill, New York 1980. 3 M.C. Kemp, The Pure theory of international trade and investment, Homewood, Englewood Cliffs 1996. 4 R. J. Ruffin, International Factor Movements, inZ: R. W. Jones, P. B. Kenen (ed.) Handbook of International

Economics, North Holland, Amsterdam-Washington, Oxford 1984. 5 R.A. Mundell, International trade and factor mobility, American Economic Review“ 1957, vol. 47.

5

productivity, trade, capital transfers and profits. Capital transfers, namely imports are enabling

quick (accelerated) catch up effects in liberalized economies well supplied in labor. Such

strategy is more sufficient than autonomous attempts to obtain technologies available on

world market. Import of technologies is more effective in financial, technical, organizational

and time terms then attempts to introduce own inventions. Nevertheless, a state that applies a

catch up strategy has to improve its research and development potential in order to be able to

upgrade the imported licenses used in production. The formerly mentioned problems (capital,

technology and labor transfers) are especially important in context of development of

transnational corporations.

Chart 1. Simplified model of linkages between localization theory and international trade

theory

Main conditions

Costs of goods transfers

I. Intensive trade and transfers of factors II. Intensive transfers of factors

Costs of

migration

of production

factors

III. Intensive trade IV . No trade

Source: J. Misala, Wspó³czesne teorie wymiany miêdzynarodowej, Warsaw 2001, p. 230.

Theory of foreign trade and migration of production factors

Theory of migration of production factors

Theory of localization

Theory of foreign trade

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Theories of capital flows can be divided into macroeconomic theories and

microeconomic theories. The first group embraces theories linked with volume of

production, absorption, currency areas, differences in costs of production factors, position of

investor, effectiveness of the production factors, differences in the interest rates, expectation

concerning productivity gains, while micro theories embrace portfolio investment theories,

companies behavior, ownership, financial liquidity, competition, theory of internal

transactions and finally mixed theories which can be represented by complex theory of

eclectic international production theory (Dunning6).

3. Conditions for FDI flows in ECE economies

Conditions for FDI flows embrace internal and external issues. External problems are

linked with ways of entering the market enabled to capital flows by institutionalization and

autonomous decisions. Capital flows are enabled and guaranteed by regional agreements

(Europe Agreement, membership in EU, OECD) or global arrangements (GATT/WTO,

IMF – art. 8 on convertibility). Internal conditions that are taken into account by investor

while studying different opportunities of engagement embrace: level of interest rate, supply in

labor and its quality, assessment of risk, assessment of profitability, expected increases in

productivity, institutional and legal arrangements, level of taxes, quality of infrastructure, size

of market and its absorption, political and economic stability, etc.

4. Definition of FDI and Available Sources of Estimations

Generally sources giving information on statistical data on FDI can be divided into national

and foreign ones7. National sources of information on FDI in Poland embrace: (1) Polish

Agency of Foreign Investments (PAIZ); (2) Central Statistical Institution (GUS); (3) Polish

National Bank (NBP); (4) specialized institutes. Foreign sources embrace: (1) data given by

international organizations (OECD, UN, WB, IMF); (2) specialized institutes. There is no need

to say that data given by foreign sources also differs.

Definition of PAIZ - covers concluded investments and short time commitments of

the investors as well as credits granted by international organizations. Data does not include

investments under 1 million US$. The main critic addressed to this source of information about 6 J.H. Dunning, Globalization, Trade and Foreign Direct Investments, Elsevier, Amsterdam 1998. 7 Statistical data on the inflow of FDI (foreign direct investments) in Poland can be found in different sources. Each data is different, what is resulted by different definitions that are used by individual institutions conducting the estimates.

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FDI is that they show value of the whole investment in the year when it is started, what should

not be interpreted as inclusion of long-term commitments. Usually investments are carried in

stages and PAIZ is showing future transfers as transfers already made. This is caused by

method of collecting data which is based on inquiries send to the companies, the given answers

result in outcome which are higher than those indicated by PNB and GUS. The main merit of

this source is that it is updated twice a year and it shows the branch structure of investments as

well as lists the names of investors and field of their activities.

Definition of PNB - is considered to be the most reliable by experts as they indicate

transfers that have taken place and are shown in the balance of payments. Estimates conducted

by PNB cover all transfers, even those of relatively small value. Additionally transfers registered

by PNB include reinvestments of profits, which in reality are not new transfers of capital from

abroad. This is a source which gives information on the structure of transfers in division to

credits of the investors, reinvestment of profits, short time investments and investments in

fixed capital assets. The procedure of calculations and processing of data conducted by PNB is

time consuming, what causes rather big delays in availability of the information.

Definition of GUS - is based on data processed by PNB, what means that all remarks

given above in comments for PNB definition are also applicable here.

Data from the three mentioned sources can be used for research on national level. For

international comparisons it is necessary to use data based on similar definitions, ie. data, which

is given by international organizations. All data indicates the trends in the inflows and illustrates

the proportions between FDI inflows in different countries.

Coming to foreign sources giving data on FDI it necessary to distinguish two types of

sources: (1) international organizations; (2) specialized institutions. First group embrace such

institutions as UN, OECD, World Bank or IMF, the second one specialized institutes, which

use the data available in officially accessible sources, ie. national data as well as statistics from

international organizations. Information coming from the first group is based on specific

questionnaires which are send out to statistical offices of countries covered by the research

what is part of international cooperation on exchange of statistical data and transparency of the

economy, considered commonly as part of the confidence building measure. Data available

here shows different values than national data, despite the fact that official national resources

are engaged in preparing it. This is caused by the structure of the questionnaire, which imposes

common denominator in defining the FDI in different countries, making them more

transparent and enabling international comparisons. All those sources use their own definitions,

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which introduce additional difference in the levels of FDI in each country in comparison with

remaining sources giving this type of information.

Conclusion: it is necessary to use one source in all dynamic analyses as all sources give

different statistical data. Using the data it is essential to remember that it illustrates the scale of

occurrence and main tendencies in this specific field.

5. FDI flows

All economies in the region can be evaluated according to above mentioned criteria,

showing advantages in one set areas and disadvantages in other. Different sources give

different evaluations of the inflows as the definition of capital flows in each case differs.

Bellow two estimates are presented: one from UN World Investment Report, second from

Transition report of the EBRD.

Table 1

Flows of capital to Czech R. Estonia, Hungary, Poland, Slovakia in 1989-2000

State 1989-1994

(annual

average)

1995 1996 1997 1998 1999 2000

Czech R. 563 2562 1462 1300 3718 6324 4595

Estonia 153 202 151 267 581 305 398

Hungary 1152 4453 2275 2173 2036 1944 1957

Poland 788 3659 4498 4908 6365 7270 10000

Slovakia 137 195 251 206 631 356 2075

Source: World Investment Report 2001. Promoting Linkages. UN , New York Geneva 2001, p. 294-295.

In table gray color is used to mark those states, which experienced highest as well as

lowest flow of FDI. Presented data is not fully comparable as all selected economies differ in size

and size of population. According to latest UN Investment Report “FDI inflows into ECE

increased in 2000 to new record level. Continuing the pattern of previous years. Western

European countries are dominated those inflows, with member countries of EU accounting for a

bulk of the flows. But inflows continued to be uneven, with three countries (Poland, Czech

Republic and Russian federation, in that order) absorbing two-thirds of this region’s total inflows.

“ In some states the flow rose, while in others it felt down. In Eastern Europe and Baltic

Republics capital inflows were dominated by FDI, the share of which increased to 70-80% of the

total net inflow. Croatia, Poland and Romania received net portfolio investments of some 2

9

billion (which also include around some $5 billion in new (gross) eurobond issues). Those figures

conceal the departure of funds from several domestic securities markets (e.g. in Czech Republic)

in search of higher yields abroad. The narrowing of yields differentials – observed in most

transforming economies – also seem to explain part of the outflow of short term funds, a

widespread phenomenon in the ECE region in the past two years. Croatia was particularly hard

hit in this regard8.

Table 2

FDI in Czech R. Estonia, Hungary, Poland, Slovakia in 1989-20011

State 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001

Czech R. - - - 983 563 749 2526 1276 1275 1275 3591 4477 6000

Estonia - - - 80 156 212 199 111 130 574 222 241 300

Hungary 187 311 1459 1471 2328 1097 4410 1987 1653 1453 1414 1650 1650

Poland - 0 117 284 580 542 1134 2741 3041 4966 6348 9299 8000

Slovakia 10 24 82 100 107 236 194 199 84 374 701 1500 2000

1 Projection

Source: Transition Report update 2001. London 2001. p. 22.

Each of the states chosen for the conducted studies also started to export capital.

Nevertheless, the proportion between imports of capital and exports are asymmetric. Value

of outflows in the selected group of states is indicated bellow. According to development

theory the consecutive stages of opening of the economy and transformation of the system

lead from imports of capital to their exports, stimulating thus flows of goods on the side of

exports as well as imports. This can be illustrated by chart prepared by P. Welfens.

8 Economic Survey of Europe. 2001 No 1. UN 2001, p. 137.

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Chart 2. Requirements for catching up strategy

Source: P. Welfens, quoted after Economic Survey of Europe UN, No.: 2/3, N.York, Geneve 2000, p. 66.

The information given by chart 2 clearly indicates that external and internal liberalization

is a precondition for normalization of relations with the surrounding world. His has to be

conducted in parallel with systemic change in legal and institutional filed. Advancement of the

reforms in individual states going through transformation of their systems is different,

moreover applied strategies also differ one from another. Dynamics of growth as well as lack

of collapse of the stock exchange can be considered as proves that the applied strategy is

effective. Most of the countries in transformation are considered by foreign investors as

similar economies. One financial crises (like the one of Russia in 1998) causes evacuation of

capital and destabilizes economies in the region. Reaction here should be less nervous as not

all economies react in same way on financial difficulties of remaining partners in the region.

This is caused by reorientation of trade and stability of the economy guaranteed by solutions

incorporated by the new system, in which experiences of Asian Tigers and Latin American

economies are taken into account. Poland is the only economy which did not experience any

tensions on financial market nor went through a collapse of stock exchange market.

Moreover, it is the only economy in the region of transforming states of East Central Europe

which indicates higher rates of growth than EU member states. Taking decision to invest –

investors should be aware more of what systemic transformation is and what are the

differences of strategies applied in individual states located here.

Political stability and credibility

Rule of law

Capital formation (functional banking and capital markets)

Privatization and FDI inflows

Education (previously elastic labor supply)

Exports of manufactoring goods plus imports of intermediate products

Foreign direct investments inflows

Innovation (R&D)

Foreign direct investments outflows

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Table 3

Outflows of capital from Czech R. Estonia, Hungary, Poland, Slovakia in 1989-20011

State Average

1989-1994

1995 1996 1997 1998 1999 2000

Czech R. 77 37 153 25 `127 90 118

Estonia 3 2 40 137 6 83 157

Hungary 22 43 -3 431 481 249 532

Poland 14 42 53 45 316 31 126

Slovakia 13 10 -5 42 -4 7 1

Source: World Investment Report 2001. Promoting Linkages. UN , New York Geneva 2001, p. 294-299.

In the group of analyzed economies it was Hungary that experienced highest level of

outflows of capital. This indicates that the country has enough capital for accumulation at

home market and tries to gain in productivity engaging own capital abroad. This pattern will

be followed also by remaining economies but it seems that such decision is still remote and

thus gives an impression of something outdistanced. Relatively high outflows were noted in

Estonian economy what can be interpreted in different ways. Firstly, this fact can be

considered as indication of wealth of the people as it is interpreted in case of Hungary.

Secondly, this can be considered as evidence of capital withdrawal from that economy by

foreign investors. Thirdly, this can be explained by intensive investments abroad motivated in

different ways. Fourthly, some investors prefer to keep their money in foreign banks not

investing them at home. Finally, this can be seen as creation of new linkages connecting this

economy with the former center in Moscow: New Arbat. Each of the solutions shows that

different motivations could have been taken into account to explain the flow outside: some

are linked with internal situation of the economy of exporter, others with external. Finally

some are rooted in psychology and do not have economic background.

FDI flows can be considered as indicators of health of the economy. Nevertheless, not

only size of inflows should be taken into account in analysis concerning economies which go

through systemic transformation. It is advisable to look into rates of growth as well as

differences between rates of growth of the transforming economies in comparison with the

EU member states. Such comparisons will show that the schedule given in Chart 2 does not

put an economy going through transformation of its systemic automatically on a catching-up

path. Nevertheless, it shows what is required as a general framework to catch-up in

development.

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Table 4

Dynamics of economic growth in transforming economies in years 1989-2001

Country 1989 1990 1991 1992 1993 1994 1005 1996 1997 1998 1999 2000 2001

Czech

Rep.

1.4 -1.2 -11.6 -0.5 0.1 2.2 5.9 4.8 -1.0 -2.2 -0.8 3.1 3.5

Bulgaria 0.5 -9.1 -11.7 -7.3 -1.5 1.8 2.1 -10.9 -6.9 3.5 2.4 5.0 4.5

Estonia 8.1 -6.5 -13.6 -14.2 -9.0 -2.0 4.3 3.9 10.6 4.7 -1.1 6.4 4.5

Lithuania 1.5 -5.0 -5.7 -21.3 -16.2 -9.8 3.3 4.7 7.3 5.1 -4.2 2.9 3.4

Latvia 6.8 2.9 -10.4 -34.9 -14.9 0.6 -0.8 3.3 8.6 3.9 1.1 6.6 4.0

Poland 0.2 -11.6 -7.0 2.6 3.8 5.2 7.0 6.1 6.9 4.8 4.1 4.1 3.5

Romania -5.8 -5.6 -12.9 -8.8 1.5 3.9 7.1 3.9 -6.1 -5.4 -3.2 1.6 2.5

Slovakia 1.4 -2.5 -14.6 -6.5 -3.7 4.9 6.7 6.2 6.2 4.1 1.9 2.2 3.0

Slovenia -1.8 -4.7 -8.9 -5.5 2.8 5.3 4.1 3.5 4.6 3.8 5.0 4.7 4.0

Hungary 0.7 -3.5 -11.9 -3.1 -0.6 2.9 1.5 1.3 4.6 4.9 4.5 5.2 4.5

Average 1.3 -4.68 -10.83 -9.95 -4.53 1.5 4.12 2.68 3.48 2.72 0.97 4.18 3.74

Source: Transition Update 2001. EBRD, London 2001. s. 15.

Indicators characterizing the transformation of Polish economy are market with gray

color. No additional comment are supplied except information on average rate of growth in

the whole period of 13 years after 1989.

Table 5

Level of GNP in candidate states, average dynamics of growth in 1989-2001, difference in dynamics towards EU states and position in EU according to size of GNP. States in

transformat

ion

Average

dynamics of

growth in

1989-2001

General

growth of

GNP in

compariso

n to 1989

Place in EU after

becoming a member

according to GNP

criteria (GNP in

billion euro in

brackets)

Dynamics of

growth of GNP

in EU in years

1989-2001

Difference

between dynamics

of transforming

country and EU

average in 1989-

2001

Czech Rep. 0,44 98 16 (62) X -1.19

Bulgaria -2,66 70 22 (14) X -4.29

Estonia 0,3 82 25 (6) X -1.33

Lithuania -2,6 64 23 (13) X -4.23

Latvia -7,7 64 24 (8) X -9.3

Poland 2.29 127 10 (202) X 0.66

Romania -2.01 77 18 (42) X -3.64

Slovakia 0,72 103 20 (22) X -0.91

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Slovenia 1.3 114 21 (21) X -.0.33

Hungary 0,85 105 17 (57) X -0.78

Average 0.91 90.4 X 1.63 -2.38

Source: Own calculations based on data from Transition Report Update 2001, EBRD, London 2001.

Indicated data do not require additional comments. It is not size of the economy that

plays main role in attracting the flows of capital it is the prospect of better return of invested

capital that matters. Poland since 1989 has applied very strict policy which has brought about

speculative results. Now after temporary slow down of the economy, caused by second stage

of reforms a new jump in rates of growth are expected. The first “growth miracle” can be

considered as effect of utilization of simple reserves in the economy. The second, coming

one will be stimulated by inflow of foreign capital.

4. FDI and trade

There were several factors that decided about the tendency observed in foreign trade of the

group of countries in question. It is difficult to pick up direct linkages between foreign direct

investments and participation of the particular economy in trade, although some signs of

mutual relations between the two can be tracked. Nevertheless, several occurrences,

independent from FDI had impact on foreign trade in those countries. Those were changes

in raw material prices, changes of prices of oil, fall of manufactured commodities prices,

changes in competitiveness caused by changes of exchange rate values of import and export

markets. Finally, in some cases institutional competitiveness has changed: ie. this was

experienced by Lithuania joining European Economic Area. In such circumstances it is

necessary to commence the analysis with general information on some noted trends in

foreign trade of the region in the last years, where a tendency of growth was observed.

After a slowdown in 1998 and beginning of 1999 the foreign trade of East Central

European states recovered in 2000 by ca 11-14% in current dollar value and 17-22 in volume.

Some of this results are ascribed to strong appreciation of dollar vis-à-vis euro, in which most

of the trade in the area is conducted – reduced exports and imports values expressed in

dollars. In values evaluated in euro – East European and Baltic trade soared by about 30-

45%. Export received strong stimulus from increasing import demand in the west market

economies, and to smaller extent by recovery of the Russian, CIS and Balkan markets. The

increases were quite remarkable, especially in first nine months of 2000, followed by mixed

performance in summer months July-September. At the end of the year the trade growth

indicator have fallen, what was especially seen in case of Croatia, Czech Republic, Hungary,

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Slovakia and Slovenia. More or less similar tendencies were observed in Latvia, but remaining

Baltic republics experienced continuation of high trade indicators. Imports in 2000 were also

high. Nevertheless the performance here was strongly influenced by large increase of world

energy prices, what caused lower indicators in comparison to exports. At the end of the year

imports decelerated inn line with exports in most of the countries of the region, what

indicated the regions’ dependence on fluctuation of euro exchange rate and world commodity

prices rather than changes in domestic demand.

Despite general positive picture of the region - as far as trade is concerned – individual

countries experienced diversified results in their trade performance. The exports growth

indicator was 13% for the whole region, while 11% for imports, what resulted in aggregate

trade deficit of US$ 26,7 billion, ie. US$ 0.85 billion higher than a year before. The dollar

value of the Baltic Republics exports and imports grew faster than in other countries of the

region: by 25% - exports and by 15% imports. Those results caused slight diminishment of

the trade deficit in those countries. South-East Europe experienced highest trade rates of

16% for exports and 14% for imports, what was the largest increase since 1995. Aggregate

deficit of the Baltic Republics shrank by 1.4 billion. Volume growth of east European Baltic

trade was higher than increase in dollar value. Both export and import volumes grew faster

than in 1999, but in year-to-year terms export growth rates indicated tendency to decelerate

(except Estonia and Hungary), while import volumes continued to rise in most economies of

the region.

Discrepancy between value and volume was partially caused by 5-7% in average dollar

value of prices of manufactured goods. Moreover, world market prices for food, beverages,

tobacco (accounting large share of region’s exports, particularly to CIS markets and in their

common trade) also fell significantly. At the same time the prices of manufactured goods

exported by western Europe fell that year, imports in this area did not grow accordingly, what

was explained as result of by rising prices of energy and remaining raw materials, considered

as obligatory imports. All in all, this was worsening the terms of trade for those countries.

Modest growth of exports (2-3%) was noted in Croatia and Slovenia. Latvia experienced

deceleration of values of trade from 10-15% to 5-10% in beginning of 2000. This tendency

was caused by deterioration of competitiveness resulted by rise of real effective exchange rate

of lat. Also of some importance were low prices for timber on world markets – main single

item exported by the country.

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Table 6

Trade balances of Eastern Europe ad Baltic states in 1995-2000 (in billion US$)

Group of countries 1995 1996 1997 1998 1999 1999

January-

Septem

2000

January-

Septem

Eastern Europe

World -19.9 -31.9 -34.6 -36.1 -33.4 =23.2 -24.7

ECE transforming economies -3.2 -3.9 -2.4 -1.0 -4.1 -3.2 -7.3

Developed market economies -15.1 -24.1 -26.5 -28.6 -22.9 -14.0 -11.5

EU -10.6 -18.0 -19.6 -21.5 -16.5 -9.6 -6.6

Developing economies -1.5 -3.9 -3.7 -6.5 -6.5 -6.0 -6.0

Baltic states

World -2.2 -3.2 -4.3 -5.0 -4.1 -2.9 -2.8

ECE transforming economies -0.5 -0.3 -0.2 -0.6 -1.4 -1.0 -1.5

Developed market economies -1.6 -2.6 -3.7 -3.9 -2.3 -1.6 -1.1

EU -1.4 -2.2 -3.1 -3.2 -1.8 -1.2 -0.8

Developing economies -0.1 -0.3 -0.5 -0.5 -0.4 -0.3 0.3

Russian Federation

World 31.5 39.1 32.0 27.7 41.6 27.5 49.9

Intra-CIS 0.9 1.3 2.4 2.4 2.4 1.4 1.7

Non-CIS economies 30.8 37.7 29.6 25.3 39.3 26.1 48.2

ECE transforming economies 5.5 8.6 8.0 6.6 8.9 5.7 11.1

Eastern Europe 4.3 6.6 5.9 5.0 6.4 4.1 7.8

Developed market economies 15.6 18.8 123.6 12.6 20.3 13.5 25.3

EU 8.4 11.5 8.4 7.5 13.2 8.6 19.0

Developing economies 9.4 10.3 8.0 6.2 10.1 6.8 11.8

Other CIS economies

World -2.1 -4.5 -4.5 -5.4 -0.6 -0.5 2.8

Intra-CIS -4.0 -5.1 -4.8 -5.3 -4.8 -3.4 -4.0

Non-CIS 1.8 0.5 0.3 -0.1 4.2 2.9 6.7

ECE transforming economies 0.1 0.1 -0.7 -0.1 0.3 -0.2 -

Eastern Europe -0.2 -0.1 -0.5 -0.1 - -0.2 -

Developed market economies -0.7 -2.3 -3.0 -1.1 -0.9 -0.2 -

EU -0.6 -1.8 -2.3 -1.0 -0.7 -0.2 -

Developing economies 3.0 2.5 4.0 - 0.4 -0.2 -

Source: Economic Survey of Europe, 2001, p. 144.

According to UN analysis the European and Baltic countries seem to be less sensitive to

currency fluctuations (ie. the movements in price competitiveness) than to demand in the

16

world commodity markets. Most of the transforming economies have rather traditional

export structure, what decided that in case of economies specialized in raw materials exports

as well as energy sources supplies – the growth of exports was one of the highest. This was

the case with Bulgaria, Lithuania, Romania, in case of which the exports increased by 20-28%

in 2000. This was so despite appreciation in real terms of their currencies. At the same time

countries with increased share of manufactured goods in their exports did also quite well.

This was the case with Czech Republic, Hungary, Slovakia, Estonia. In others like in Slovenia

the growth was moderate. Still in other cases greenfield investments and high degree of

vertical integration into the production networks of multinational companies had a crucial

meaning for improvement of trade performance.

According to the UN’s Survey of Europe - foreign subcontracting was the major factor

in Estonia’s rapid export growth, where more than 34% increase was generated by the

Elcoteq Tallin enterprise, which since early 1999 has nearly tripled its share of the country’s

exports, accounting for 26% of total exports of that country in 20009. Elcoteq Tallin is a

subsidiary of a Finish company. It currently employs 3150 people and makes cell phone

components from imported inputs (mainly from China) for Nokia and Ericson. Elcoteq’s

Estonian branch plans to start production in a new plant in Tallin by April 2001. It is

expected that the plant will deliver electronic components for mobile communication

substations. There was an information in Reuters News Service stating that Elcoteq will end

the assembly of Ericson telephones in Estonia (and Hungary) what was resulted by decision

to sell the telephone production operation10. Nevertheless, this was not followed by any

additional announcement about changes in the planned expansion of production.

9 Economic Survey of Europe. 2001 No 1. New York, Geneva 2001, p. 144. 10 Reuters News Service, 7 and 29 January 2001.

17

Table 7

Current account balances in Central and Eastern Europe, Baltic states and Russia in 1989-2001 (in per cent of GDP) Kraj 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 Change

1989-

2000

Czech R - - - - 1.3 -1.9 -2.6 -7.4 -6.1 -2.4 -3.0 -4.8 -5.1 -1.8

Estonia - - - 3.3 1.3 -7.3 -4.4 -9.1 -12.2 -9.2 -5.7 -6.8 -7.7 -1.0

Hungary -4.6 0.4 0.8 0.9 -9.0 -9.4 -5.6 -3.7 -2.1 -4.9 -4.2 -3.5 -5.4 0.8

Latvia - - - - 19.1 5.5 -0.4 -5.4 -6.1 -10.7 -9.7 -6.8 -7.1 2.9

Lithuania - - - - -3.2 -2.2 -10.2 -9.2 -10.2 -12.1 -11.2 -6.0 -6.4 5.2

Poland -2.2 1.0 -2.6 1.1 -0.7 0.7 4.5 -1.0 -3.2 -4.4 -7.5 -6.2 -6.0 1.3

Slovak R - - - - -4.7 4.6 2.1 -10.6 -9.6 -9.7 -5.5 -3.4 -3.8 2.1

Slovenia 9.0 3.0 1.0 7.4 1.5 4.0 -0.5 0.2 0.1 -0.8 -3.9 -2.9 -3.0 1.0

Bulgaria -1.6 -8.2 -1.0 -4.2 -10.1 -0.\3 -0.2 0.2 4.2 -0.5 -5.5 -5.8 -5.2 -0.3

Romania - -9.6 -3.5 -8.0 -4.5 -1.4 -5.0 -7.3 -6.1 -7.7 -3.8 -3.9 -3.9 -0.1

Croatia - - -3.4 3.2 5.7 5.9 -7.7 -5.5 -11.6 -7.1 -7.6 -4.7 -4.9 2.9

Russia - - - - - 2.9 2.3 3.0 0.5 0.4 13.5 18.3 10.2 4.8

Source: Transition Report update 2001, London EBRD, p. 18.

More or less similar experience was noted in Slovakia, where the exports went up as a

result of expansion of Volkswagen (Germany) which now accounts for over 16% of total

exports of this country11. In 2000 Volksvagen raised its Slovak production of VW Golf and

Bora family cars to 180 000 from 126 000 in 1999. VW also assembles gearboxes in

Bratislava, the output of which increased to 363 700 units in 2000. At the same time the

gearbox components output was 8 million units. In May 2000 the manufacture of gearbox

components was started at Martin in Northern Slovakia. Big share of this volume output is

distributed via the VW distribution network Slovakia. VW export revenue in 2000 reached Sk

84.8 billion, over 16% of total Slovak exports12. Same situation was noted in other

economies in the region: namely Czech Republic, Hungary and Poland. In those three

economies mainly increase of machinery exports and transport equipment sectors heavily

invested by EU and US multinationals13. The increase of exports after move of the

production to one of the transforming economies is caused by increased competitiveness of

that good resulting from lower wages, access to advanced technologies by skilled labor and

use of developed and effective nets of distribution belonging to the multinational investor.

11 Economic Survey of Europe 2001 No 1, New York, Geneva 2001, p. 145. 12 Slovak Press Agency, quoted after Reuter News Service, 1 February 2000. 13 Ibidem. p. 145.

18

Table 8

Current accounts of Czech Republic, Estonia, Hungary, Poland, Slovakia and Slovenia in million US$ in 1993-2001 Kraj 1993 1994 1995 1996 1997 1998 1999 2000 2001

Czech R 456 -787 -1369 -4202 -3211 -1338 -1567 -2369 -2700

Estonia 22 -167 -157 -398 -563 -478 -294 -332 -417

Hungary -3453 -3912 -2480 -1678 -982 -2298 -2076 -1648 -2600

Poland -600 677 5310 -1371 -4312 -6858 -11569 -9892 -10000

Slovakia -601 665 391 -2098 -1952 -2059 -1083 -680 -827

Slovenia 192 574 -100 31 12 -147 -783 -540 -590

Source: Transition Report Update 2001. London 2001, EBRD. p. 59, 61, 69, 81, 87, 89.

The above data indicates fluctuations of the size of current account deficit caused by

different stages of exchange rate policy, opening of the economy and effects of FDI

engagement in the economy. Traditionally at the beginning transnationals import

technologies from abroad as well as most of the components, but with time passing imports

are replaced by production of companies functioning on the domestic market of the country

of engagement, what in turn is replaced by increased exports.

Generally opening of the economy, resulting in increase of current account deficit, often

coming close to the security margin measured by share in GNP ca 12% is not resulting in

financial crash but on the opposite accelerates the recovery of the economy by speeding up

the process of restructuring (Table 7). This can be best exemplified by the case of Estonia or

Poland.

5. FDI flows in Poland

Volume of foreign direct investments invested in Poland differ in diverse sources giving

that data, what is caused by diversified definitions applied by individual centers dealing with

this issue. In the recent years, Poland has become the leader among Central and East

European countries with respect to the volume of foreign direct investment inflow. It is

worth mentioning that this position is achieved partially by the size of the economy but most

of all by macropolicies applied by the government, which guarantee safe returns and profits

to investors. It was the process of Poland's political and economic transformation that

constituted the key factor stimulating the inflow of direct investments to Poland, what has

generated favourable legal, economic and infrastructure conditions for foreign investors.

19

Chart 3. Accumulated value of FDI in Poland in 1989-2000

8 105 324 14082828

43216832

14027

17705,4

27279,6

35171

49392,5

0

5000

10000

15000

20000

25000

30000

35000

40000

45000

50000

1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000FDI in mln US$

There have been also other factors that might be worth mentioning. Poland's OECD

membership (as of 1996) brought new quality in procedures and regulations applied to

foreign investors, ensuring, among other things, equal treatment on par with their domestic

counterparts. Poland's entry into NATO (1999) has also been an encouraging factor as it

ensured the country's geopolitical stability. Poland's imminent EU membership and the

implementation of acquis communautaire will surely help to create an ever more auspicious

investment climate in Poland and in this way boost the inflow of foreign direct investment

funds into this country.

5.1. The level of foreign direct investments in Poland in the first half of

2001

In the first half of 2001 foreign companies invested in Poland US$ 3.26 billion. The

information is given after the data compiled by the Polish Agency for Foreign Investment

(taking into consideration only investments exceeding one million US$ each). The cumulative

value of foreign direct investment has reached the figure of US$ 48.4 billion.

Investment inputs of below one million US$ are estimated at US$ 3.8 billion. Total

foreign capital invested in Poland so far has reached the value of US$ 52.2 billion14. Almost

92% of foreign direct investment came to Poland from the OECD countries. Investors from

the European Union are responsible for 68.1% of inflow into this country. Investors from

14 According to former estimates the total amount was evaluated at 49,4 billion. Those estimates include investments below 1 million US$.

20

North America invested 15.5%; while Asian countries participate in 4,7% of the total value of

foreign investments.

According to PAIZ in 2000 inflows of FDI were estimated at US$ 10,6 billion. This was

the record year of inflows, higher by 0,5 billion in comparison with 1998, considered as pick

year of inflows in the 1990’s. According to data given by PAIZ the inflow in 2000 was twice

as big as the inflow in 199915.

Other sources publishing the data on FDI give different amounts of inflows, what is

explained by used definition. Utilization of data given by PAIZ can be explained by the fact

that this data is the most current from the available sources of national and international

origin. Nevertheless, also other sources should be quoted in the study, what increases its

informative character as well as objectiveness of collected, processed and presented data.

According to GUS the total value of inflows in 1999 amounted to US$ 7269,6 million,

while in 2000 they reached US$ 9342,3 million16. According to data evidenced within the

balance of payments FDI in official publication of Central National Bank the amount of FDI

in 1999 was US$ 7.3 billon, while in 2000 the evidenced flows amounted to US$ 9,4 billon17.

In the first half of 2001 the inflow of capital within foreign direct investments was similar as

in first half of 2000 – amounting to US$ 2,70 billon (US$ 2,74 in first half of 2000)18. Data

given by GUS and National Central Bank are alike.

5.2. The number of companies on the "List of Major Foreign Investors in

Poland"

Direct investments in Poland toped US$ 9 billion in 2000, what was boosted by the

governments sale of 35% of the telecommunication operator, Telekomunikacja Polska SA. to

French investor France Telecom for US$ 4.3 billion, a 35% stake in Orbis hotels for 0.1

billion and stakes in two electric power generators for US$ 0,1 billion.

In middle of 2001, the "List of Major Foreign Investors in Poland" consisted of 881

companies from 35 countries. Eight per cent of the companies were registered on the list for

the first time. For the last seven years, the number of enterprises with the participation of

foreign capital monitored by PAIZ has been growing rapidly. Enough to say that on the first

published PAIZ list, there were were 93 companies who invested more than one million

dollars each. The number of such companies increased to 362 in 1995, and 585 in 1997.

15 Inwestycje zagraniczne w Polsce. Raport roczny. Warszawa 2001. p. 106. 16 Rocznik Statystyczny Rzeczpospolitej Polskiej. Statistical Yearbook of the Republic of Poland, GUS 2001, p. 478. 17 Bilans P³atniczy Rzeczpospolitej Polskiej za pó³rocze 2001 roku. NBP, Warszawa 2001. 18 Ibidem, p. 43.

21

The largest group of investors (203 in all) comes from Germany, the second largest (123)

from the United States, the third (81) from France, followed by Netherlands (67) and Italy

(62 companies).

The volume of direct foreign investments by country of origin has changed since 1989.

Some of the countries are present all the time, others lost their leading positions, while

remaining gained or shifted on the list upward or downward.

As far as the list of investors is concerned the highest ranking on PAIZ list belongs to

French Telecom (3199,4 mln US$), Fiat (1637,7 US$), Daewoo (1552,3 US$), Citibank

(13000,0 US$), and finally RAO Gazprom (1283,8 US$). It is worth nothing that investments

of French Telecom – mainly into privatised Telekomunikacja Polska S.A. amounted to 40%

of the capital engagement of the French companies.

In 2000 highest growth of investments was noted in case of French, Swedish, Belgian

companies. The indicators in case of companies representing those countries have increased

by over 50%. High dynamics of FDI was also noted in case of investors originating from

USA, Austria, Holland, Denmark, Luxemburg and Japan. In case of the last country the

investments concerned increase of capital in formerly established companies, what means

that no new investors occurred on the market neither new investments were carried out,

moreover number of companies engaged from Japan decreased.

Chart 4

Inflow of FDI in 1989-2000 according to exporting country

0

1000

2000

3000

4000

5000

6000

7000

8000

Francja USA Germany Holland Italy UK Sweden Korea

22

As far as the origin of invested capital is concerned, the first half of the 2001 saw no

significant fluctuations in the position of investors as compared to the previous year. The

French investors with US$ 8.5 billion were ranked the first. Americans have invested US$ 7.4

billion in Poland, and Germans - 6.3 billion. The fourth position belongs to Dutch investors

with US$ 4.4 billion. Italian companies invested over US$ 3.4 billion. British corporations,

occupying the sixth place on the list, have invested US$ 2.6 billion in Poland so far. Capital

invested by international investors has reached the value of US$ 2.6 billion. The eighth place

on the list belongs to Swedish investors (US$ 2.1 billion), the ninth to Korean investors (US$

1.6 billion). The last among the top ten is Russia (US$ 1.2 billion). The position of other

countries in the ranking is shown in the table below. Foreign direct investments in Poland

can be presented also by national economy sectors. The analysis of the by-branch pattern of

foreign direct investment in recent years reflects a continuing tendency towards

diversification. Most of the direct investment in Poland has been made in the traditional

sectors of the national economy, and primarily in the manufacturing sector. The sector has

attracted the greatest interest of foreign investors and absorbed the highest investment

outlays.

The development dynamics of the manufacturing sector has been stable, but it is

significant that its share in the accumulated value of direct investment compared to previous

years has been gradually declining. In 1997 the percentage share of that sector in overall

investments amounted to 62.4%, in 1998 - to 58.3 %, in 1999 - to 49.2%, and in June 2001-

to just 41.7%. This is a positive trend as it indicates a gradual shift in investment outlays in

Poland, in line with the tendencies observed in highly developed countries. New investment

projects carried out by foreign companies have increased the amount of capital involved in

the services sector.

The largest investment outlays in the manufacturing sector have been registered in the

production of food, beverages and tobacco: the volume of investment has reached US$ 5.4

billion, that is 11.1% of all the investments in the sector. The second largest outlays – US$ 5.3

billion (11%) - have gone to the transport equipment production. Products made of other

non-metal raw materials have absorbed US$ 2.7 billion (5.7%) of investment. More than US$

1.5 billion (3.2%) has been invested in pulp, paper, printing and publishing. The electrical and

optical equipment manufacturing sector with investment outlays of US$ 1.5 billion (3.3%) has

been ranked fifth. An inflow of more than US$ 1.2 billion (2.6%) was registered in the

chemical sector. The share of each of the other subsections in the branch structure amounts

to about and less than 1%.

23

The second largest sector of the economy in terms the inflow of direct foreign investment

is financial services. The accumulated value of investments recorded in that sector by PAIZ at

the end of June of 2001 amounted to more than US$ 11.1 billion , that is 23% of the overall

inflow of direct investment into Poland.

Table 9

FDI in Poland - breakdown by country

No

.

Country of

origin

Capital invested

(in US$ mn)

Planned

investment

(in US$ mn)

Average

value of

investment

Number of

investors

1 France 8,535.00 1,268.9 105.37 81

2 USA 7,458.70 2,024.9 60.63 123

3 Germany 6,339.60 1,117.1 31.23 203

4 Netherlands 4,404.30 554.8 65.74 67

5 International 2,323.00 815.1 122,26 19

6 Italy 3,491.50 1,170.4 183.76 62

7 Great Britain 2,630.80 281.4 69.23 38

8 Sweden 2,196.10 332.1 39.92 55

9 Korea 1,616.30 25.2 404.07 4

10 Russia 1,255.40 301.0 627.7 2

11 Austria 1,202.10 154.4 30.82 39

12 Ireland 1,046.70 0.0 348.9 3

13 Switzerland 897.30 321.6 448.65 20

14 Denmark 783.20 74.7 819.2 36

15 Belgium 576.00 75.8 26.18 22

16 Norway 542.60 178.0 36.17 15

17 Japan 505.20 90.0 45.92 11

18 Greece 501.50 4.0 250.75 2

19 Finland 416.60 69.6 434.6 18

20 Portugal 413.70 74.8 82.74 5

21 Spain 385.80 0.0 55.11 7

22 Canada 250.00 41.3 17.86 14

23 Croatia 173.00 16.0 86.5 2

24 Turkey 100.10 58.0 25.25 4

25 Luxemburg 77.80 4.0 12.96 6

26 Australia 67.00 4.0 33.5 2

24

27 Israel 55.40 20.0 13.85 4

28 China 45.00 45.0 27.50 2

29 Czech Republic 39.50 0.0 9.87 4

30 RSA 35.00 95.5 17.50 2

31 Lichtenstein 31.90 27.0 7.97 4

32 Cyprus 17.00 0.0 8.50 2

33 Slovenia 10.00 50.0 10.0 1

34 Taiwan 5.70 200.0 5.70 1

35 Malta 1.00 na 1.0 1

Source: PAIZ

The list of investors indicates four post-communist states, which invested in the Polish

economy. Those are Russia (10), Croatia (23), Czech Republic (29), Slovenia (33). The biggest

investments come from Korea, Russia and Switzerland. As far as scope of investments are

concerned biggest investors come from: France, USA, Germany and Holland. Next position

on the list is held by international organizations, which participate in the process of

recovering the enterprises in all post-communist states.

Table 10

Foreign direct investments in 2000 by countries indicating fastest increase of investments in the Polish economy (in million US$)

Invested capital Number of investors Country

1999 2000

1999=100

1999 2000

1999=100

France

USA

Holland

Ireland

Austria

Sweden

Denmark

Japan

Belgium

Spain

Luksemburg

Israel

3854,7

5152,9

3233,2

813,7

799,4

789,2

541,4

374,4

289,8

259,3

11,6

5,4

7901,0

7350,3

4224,9

1025,0

1172,2

2027,9

741,2

476,0

587,5

377,9

17,2

83,4

205,0

142,6

130,7

126,0

146,6

256,9

136,9

127,1

203,0

145,7

148,3

1544,4

67

125

49

3

32

43

30

12

21

6

2

3

70

130

66

3

38

53

34

11

23

7

3

5

104,5

104,0

134,7

100,0

118,8

123,3

113,3

91,7

109,5

116,7

150,0

166,7

25

Total value of

investments

exceeding 1

million US$

35171,0 45772,0 130,1 799

885 110,8

Total 38912,6 49392,5 126,6 x x x

Source: PAIZ

Comparisons of dynamics of increase of value of investments with dynamics of number

of investors representing individual countries shows that the dynamics of number of

investors is not so high. This leads to a conclusion that Polish economy has attracted big

individual investors, what can be proved by case of France’s Telecom as well as investments

from Israel. The latter was not present on Polish market before (5,4 mln US$). Investments

of two big investors from Israel have increased significantly the value of investments of this

country in Polish economy (which reached 78 million US$).

Table 11

Foreign Direct Investments in Poland Breakdown by sector in 2000

ECA

Capital invested (in USD

mn )

Planned Investment (in

USD mn)

Manufacturing: 20,237.9 4,308.06

Food processing 5,379.8 518.1

transport equipment 5,306.6 304.8

other non-metal goods 2,755.7 805.9

Pulp and paper, publishing and printing 1,559.3 376

electrical machinery and apparatus 1,581.8 380.46

chemicals and chemical products 1,267.4 436.9

rubber and plastics 591.2 198.9

furniture and consumer goods 458.8 287.9

metals and metal products 408.9 776.2

wood and wooden products 379 38.2

machinery and equipment 281.1 128.8

fabrics and textiles 252.8 55

leather and leather products 15.5 0.9

Financial intermediation 11,116.9 200.3

Transport, storage and communications 5604.7 529.3

Trade and repair 4628.7 722.8

26

Construction 2678.1 958.6

Community, social and personal services 1,622.1 594

Power, gas and water supply 1,225.2 384.8

Hotels and restaurants 697.6 262.2

Real estate and business activities 491.7 1,521.4

Mining and quarrying 87 0

Agriculture 39.9 13.1

Source: PAIZ

Traditionally one can observe clear pattern of engagement of FDI in all ECE economies.

First interest in primary phases of transformation are concentrated on food processing sector,

with time passing FDI are moving to other sectors mainly services but also to some extent also to

industrial type of production.

Chart 5

Foreign direct investment stock (in %)

Source: PAIZ

27

Structure of engagement of FDI by sectors was following in Poland in 2000: manufacturing –

44%, financial intermediation – 24%, transport, storage and communication – 12%, trade and

repair – 10%, construction – 6%, community, social and personal services – 4%.

Table 12

Foreign Direct investments in Poland – Breakdown by region

Voivodship Number of foreign investors, July 2001

Mazowieckie 582

Œl¹skie 266

Wielkopolskie 237

Dolnoœl¹skie 175

Pomorskie 144

Ma³opolskie 125

£ódzkie 119

Kujawsko-Pomorskie 86

Zachodniopomorskie 83

Lubelskie 59

Podkarpackie 57

Lubuskie 51

Œwiêtok

Rzyskie 47

Warmiñsko-Mazurskie 47

Opolskie 39

Podlaskie 32

Source: PAIZ

Foreign capital seeks engagement in regions which are characterized by well-developed

infrastructure, ie: urban areas with cultural and communication infrastructure. In other words

most of the investments are conducted close to following urban centres: Warsaw, Poznan,

Cracow. Too some extent engagement is noticed in regions with high availability of skilled

labor released from manufacture type of production. This is the case with Silesia. Now the

capital engagement slowly is also moving to regions that were not formerly attraction for

investors. This is eastern part of Poland. The location decisions in this case are subordinated

to the fact of close distance to eastern borders of Poland, with potential markets of the CIS.

6. FDI and trade in Poland

28

Trade has increased in quantity thanks to FDI. This reflects the improvement of

competitiveness of the Polish exports caused by utilization of advanced technologies imported

within the framework of Transnational Corporations that are present in Poland. FDI have also an

important impact on quality of exported goods. This can be evidenced both on side of increased

imports as exports. Companies with presence of foreign direct investments indicate bigger

engagement in foreign trade than those companies with national capital. The number of foreign

companies was increasing rapidly after 1989. The evolution of this type of companies is shown in

Table below.

Table 13

Number of companies with foreign investment in 1991-98 (31 December)

Year Number of companies Share in general number of

companies

1991

1992

1993

1994

1995

1996

1997

1998

1999

5583

10817

15814

20324

24635

29157

33459

37355

42322

4,1

6,9

8,6

10,4

11,7

12,2

12,8

12,6

12,9

Source: Ma³y Rocznik Statystyczny 1996, Biuletyn Statystyczny 1/1999 GUS, February 1999. Biuletyn Statystyczny GUS 1/2000.

Data shows that despite the increasing value of inflow the number of companies with foreign

capital is increasing in comparatively smaller rates. This indicates that the size of companies is

increasing.

29

Table 14

Exports as share of total activities of the enterprises with foreign capital

Export sales of companies with foreign capital Year Export sales

As % of their incomes Export inclination in

comaprison to remaining

companies=100

1994 9,0 15,6 173

1995 9,5 15,3 161

1996 8,8 13,9 158

1997 8,0 13,8 172

1998 9,1 13,9 182

1999 9,3 14,2 179

Source: Inwestycje zagraniczne w Polsce, IKiC 1999, p. 37.

Export is a basic indicator for successful internationalization of an enterprise. Across the

region rates of growth of exports were high but at the same time very unstable. Figures on trade

as percentage of GDP in 1999 show that Poland despite unprecedented increase in exports

during the 1990s, was still less integrated in the \world economy than Spain. However Czech

Republic and Hungary have higher levels of trade in goods than Portugal or Greece, while

Estonia and Slovenia are considered to be most open economies in the region. Relatively higher

share of industry in the economic

The relatively higher share of industry in the economic activities of most ECE states is

reflected in export structure dominated by manufacturing exports. Foreign trade statistics of all

ECE states with Poland in that number show a significant improvement in terms of

competitiveness through increased in unit prices. During the early 1990’s the structure of exports

initially moved to labor intensive industry products. However in the middle of 1990’s this trend

has been reversed and the share of skill, capital and technology intensive products is increasing19.

By 1999 the shares of high tech exports in manufacturing range from 3% (Poland) to 9%

(Estonia), compared to that of the Southern EU member states. Hungary is clear outlier with the

share of high-tech exports amounting to 21% of manufactured exports, higher than German or

Danish corresponding figure (15% and 18 respectively). This performance is almost whole driven

by FDI companies.

Foreign direct investments were strong incentive driving up productivity in the enterprises

with foreign input. Those linkages were not only capital but also often achieved without capital

19 Innovation policy issues in six candidate countries: the challenges. Directorate Generale on Enterprises. 2001, p.

59.

30

engagement through commissioned orders on services (ie. sewing cloths from send fabrics and

according send patterns). The economies of Transforming states were renewed by strong influx

of FDI. This was achieved through their participation in privatization and restructuring of the

formerly planned economies20. The main impact of FDI on innovation and thus on trade in case

of East Central European economies is ascribed to the stimulation of evolution from cost-related

motivations towards production of higher value added goods, which require interaction with local

research and network of higher technology subcontractors21.

It is evidenced in studies related to FDI impact on transforming economies that foreign

capital per se is important for the economy which went through strong sterilization of savings

conducted within the process of liberalizing prices, leading to elimination of inflation overhang

so characteristic for all post-communist states which were deficit economies (using the Kornai’s

wording)22. This is not the only role ascribed to FDI as they at the same time transfer assets from

less to more efficient owners. This latter aspect is very important for a transforming economy,

where foreign investors have advantages in terms of corporate governance as well as in terms of

easier access to capital markets and technology. This results in large differences in terms of

productivity between domestic and foreign own firms in all transforming economies23. This in

turn results in falling unit costs of production and finally enables increasing price

competitiveness. According to conducted surveys the productivity in foreign investment

enterprises varied from 150% (Estonia) to almost 300% (Hungary) of that of domestic

enterprises in 1998. This evidences that FDI play a very positive direct role in the hosting

economies. Productivity in some enterprises with foreign investments in transforming economies

are often higher than in EU members-states.

From e 1995 the importance of exports of SMEs increased significantly. In 1995 those

companies accounted only slightly more than 40% of totals exports of SMEs. Whereas in 1999

this indicator mounted to over 47%. The share of foreign trade in SMEs activities has also

increased.

20 M. Landesmann, Structural change in the Transition economies, 1989-1999, in United Nations Economic

Commission for Europe 2000. 21 S. Radossevic, Patterns of innovative activities in countries of central and eastern Europe, an aqnalysis based on

comparison of innovation surveys. SPRU Working Paper.www.suusex.ac.uk/spru 22 http://www.oecd.org/dsti/sti/prod/sti_wp.htm 23 http://europa.eu.int/comm/enlargemnt /report_11_00/index.htm

31

Table 15

Structure of exports and imports of SMEs by size of enterprises Structure of exports of SMEs by size of entrprises

1995 1998 1999 Specification

US$

thousands

% US$

thousands

% US$

thousands

%

Total 8 815 420 100 13 359 823 100 13072118 100

0-9 employees 2774858 31.48 3 681 631 27.56 3 605 868 27.59

10-49

employees

2 451 589 27.81 3 544 327 26.53 3 293 891 25.20

50-249 3 588 973 40.71 6 133 865 45.91 6 172 358 47.22

50-249 employees

Structure of imports SMEs by size of enterprise

1995 1998 1999 Specification

US$

thousand

% US$

thousand

% US$

thousands

%

Total 16 034 735 100 29 872 000 100 30 041 505 100

0-9 employees 5 707 164 35.59 9 056 326 30.42 9 834 769 32.74

10-49

employees

5 275 443 32.94 9 613 310 32.18 9 366 676 31.18

50-249 5 052 128 31.51 11 202 364 37.50 10 840 060 36.08

Source: Report on the Condition of SMEs p. 55.

Collected data indicates that share of exports in SMEs grows with number of engaged

employees. This means that really small companies engaging to ten workers are engaged in trade

to lower extent than those companies, where the indicator reaches 50-249 employees. Noted

trade pattern concerning recovery in exports and slight reduction of imports can be observed in

SMEs trade24.

Regional differentiation has an impact on the engagement of individual regions in trade and

attractiveness for FDI. As structure of the companies in Poland is similar to structure in member

states it is clear that biggest engagement of FDI can be seen in small and medium enterprises.

Capital engaged in the economy is not distributed evenly across the country, what means that

engagement of different regions in trade is differentiated. In 1999 small and medium size

enterprises from Slask voivodship had lowest share in exports of individual voivodships

(26,8%)25.The highest level of exports of individual voivodships was noted in podlaskie

voivodship (over 75%). Understanding this indicator one has to take into account that it reflects 24 Enterpreneurial training for growth of small and medium sized enterprises, European Training Foundation, 2000. 25 Report on the condition of the small and medium-size enterprise sector in Poland for years 1999-2000. Polska

Agenda Przedsiêbiorczoœci, Warsaw 2001. p. 57-59.

32

the importance of Sees in exports of particular voivodship, whereas the level of development of

sector in the region is described by the ratio of exports of SMEs from the voivodship to total

SMEs exports. As result, SMEs in four most developed voivodships (Mazowieckie,

Wielkopolskie, Œlaskie and Dolnoslaskie) accounted for an excess of 53% of total SMEs: exports,

while SME’s located in voivodships where the sector was least developed (Opolskie, podlaskie,

Swietokrzyskie and Warminsko-Mazursakie) accounted for less than 3% of those exports. In

remaining voivodships the ration falls between 3-7%26.

Between 1995-1998 shares of SMEs in total exports remained high amounting to more than

65%. This indicator in comparison with the 1998 figure, increased by over 2%. In conditions of

slight fall in the share of SMEs in total exports (47,6%) resulted in lack of balance in foreign trade

in the SMEs sector.

In almost all voievodships SMEs were responsible for 50% of total imports. In 1999 – 3

most developed voievodships (Mazowieckie, Slaskie, Wielkopolskie) accounted for more than

65% of SMEs imports. Those regions were at the same time the biggest importers in the Polish

economy.

The analysis of exports uses as a criterion of assessment of enterprise activities a ratio of

value imports in individual voivodship per capita. Mazowieckie voievodship in this ranking found

itself on first position, far ahead all other voivoships. In 1999 the indicator achieved US$ 2750 in

per capita terms. This indicator was 2,5 times higher than in Wielkopolskie (US$ 1049) and 3,5

times higher than national average indicator, estimated at US$ 777 (also in per capita terms).

In 1999 the highest trade deficit was noted in Mazowieckie voievodship, where the excess of

imports over exports amounted to US$ 11,1 billion, ie. 65,5% of the total deficit of all SMEs.

In 1999 only five voivodships (Podkarpackie, Lubelskie, Lubuskie, Warminsko-Mazurskie

and Podlaskie) achieved surplus in the foreign trade of SMEs. However, the totals surplus of

SME foreign trade from those five voievodships in 1999 amounted to 2% of entire value SMEs

sector's deficit.

7. Conclusions

Study indicates important role of FDI in changes of ownership, productivity, functioning of

the economy, quality of production, exports innovativeness, competitiveness and exports.

Structure of trade has changed as result of FDI in most ECE economies. Studies noted a move

from labor intensive type of production towards capital intensive. Enterprises with FDI

component are more active in foreign trade than those without such component. They move

26 Ibidem.

33

from imports to exports. Most of the trade is conducted by SMEs. The regional engagement of

FDI is geographically unequal. This inequality results in differentiated impact of those regions on

trade deficit or surplus. Companies employing bigger number of employees are more active in

foreign trade. The share of exports of SMEs ranges between 25-47%.

Economies of East Central Europe indicate different results in rates of growth as well as

attracting FDI flows. Those two indicators usually go in team together, what is a naturally

resulted by risk evaluating companies. Moreover, economies well supplied in labor with high rates

of growth are better guarantees of return of invested capital than those with feeble indicators.

Difference in rates of growth and engagement of the FDI in different regions of Poland is also a

potential source of growth, what is evidenced by data concerning voivodship analyses.

Studies dealing with foreign trade of transforming economies indicate that economies of such

states are sensitive to fluctuation of exchange rate. Nevertheless, their exchange rate policy

cannot be considered also as neutral; to trade, what is reflect by presented statistics. Most SMEs

find advantages joining quickly eurozone.

34

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